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MIFIDPRU 2.6 The group capital test

MIFIDPRU 2.6.1R

1This section applies to an investment firm group that has been granted permission by the FCA to apply the group capital test under MIFIDPRU 2.4.17R.

Group capital test: requirements

MIFIDPRU 2.6.2R

1For the purposes of MIFIDPRU 2.6:

  1. (1)

    ‘own funds instruments’ means own funds as defined in MIFIDPRU 3, without applying the deductions referred to in MIFIDPRU 3.3.6R(8), article 56(d), and article 66(d) of the UK CRR;

  2. (2)

    the terms ‘investment firm’, ‘financial institution’, ‘ancillary services undertaking’, ‘tied agent’ and ‘relevant financial undertaking’ include undertakings established in third countries that would satisfy the definitions of those terms if they were established in the UK.

MIFIDPRU 2.6.3G

1The definition of ‘own funds instruments’ for the purpose of MIFIDPRU 2.6.2R ensures that significant investments in common equity tier 1 instruments, additional tier 1 instruments and tier 2 instruments of financial sector entities in the investment firm group do not need to be deducted by a parent undertaking when applying the group capital test. This is to avoid ‘double counting’ of those investments.

MIFIDPRU 2.6.4G

1MIFIDPRU 3.7 contains rules and guidance on the composition of capital for parent undertakings subject to the group capital test.

MIFIDPRU 2.6.5R

1Where the FCA has granted an application under MIFIDPRU 2.4.17R, a UK parent entity and any other GCT parent undertakings in the investment firm group must hold own funds instruments sufficient to cover the sum of the following:

  1. (1)

    the sum of the full book value of their holdings, subordinated claims and instruments referred to in MIFIDPRU 3.3.6R(8), article 56(d), and article 66(d) of the UK CRR in relevant financial undertakings in the investment firm group; and

  2. (2)

    the total amount of their contingent liabilities in favour of relevant financial undertakings in the investment firm group.

MIFIDPRU 2.6.6G
  1. (1)

    1Each GCT parent undertaking in the investment firm group must satisfy the group capital test. The group capital test can therefore apply at each level within the group structure. This mitigates the risk of leverage or capital gearing being introduced at levels underneath the UK parent entity.

  2. (2)

    The requirement in MIFIDPRU 2.6.5R only applies to GCT parent undertakings. However, MIFIDPRU 2.6.7R imposes obligations on GCT parent undertakings in relation to their subsidiaries that are:

    1. (a)

      parent undertakings established in a third country; or

    2. (b)

      parent undertakings incorporated in, or with their principal place of business in, the UK that are not GCT parent undertakings.

  3. (3)

    This prevents leverage and capital gearing being introduced into the investment firm group through:

    1. (a)

      intermediate parent undertakings established in a third country; or

    2. (b)

      intermediate parent undertakings in the UK to which the group capital test does not directly apply.

MIFIDPRU 2.6.7R
  1. (1)

    1This rule applies where:

    1. (a)

      an investment firm group has been granted permission to apply the group capital test under MIFIDPRU 2.4.17R; and

    2. (b)

      a parent undertaking in that investment firm group is a relevant financial undertaking and either:

      1. (i)

        is established in a third country; or

      2. (ii)

        is incorporated in, or has its principal place of business in, the UK and is not a GCT parent undertaking.

  2. (2)

    Where this rule applies, the responsible UK parent must either:

    1. (a)

      ensure that the undertaking in (1)(b) holds own funds instruments sufficient to cover the sum of the amounts in MIFIDPRU 2.6.5R(1) and (2) as they would apply to that undertaking; or

    2. (b)

      hold own funds instruments sufficient to cover the sum of the amounts in MIFIDPRU 2.6.5R(1) and (2) that:

      1. (i)

        apply to the responsible UK parent itself; and

      2. (ii)

        would apply to the undertaking in (1)(b).

MIFIDPRU 2.6.8G
  1. (1)

    1The effect of MIFIDPRU 2.6.7R is shown through the example below of a hypothetical investment firm group that contains the following undertakings:

    1. (a)

      a UK parent entity (“A”);

    2. (b)

      an intermediate investment holding company (“B”), that is incorporated in the UK and is a direct subsidiary of A;

    3. (c)

      an undertaking established in a third country (“C”) that would be an investment holding company if it were established in the UK and that is a direct subsidiary of B;

    4. (d)

      an undertaking established in a third country (“D”) that would be a MIFIDPRU investment firm if it were established in the UK and that is a direct subsidiary of C;

    5. (e)

      a MIFIDPRU investment firm (“E”) that is a direct subsidiary of D;

    6. (f)

      a tied agent (“F”) that is established in the UK and that is a direct subsidiary of B;

    7. (g)

      an undertaking established in a third country (“G”) that would be a financial institution if it were established in the UK and that is a direct subsidiary of C;

    8. (h)

      an intermediate holding company (“H”) that is incorporated in the UK and is a direct subsidiary of A; and

    9. (i)

      an authorised payment institution (“I”) that is incorporated in the UK and is a direct subsidiary of H.

  2. (2)

    The group capital test:

    1. (a)

      applies directly to A and B because they are both GCT parent undertakings;

    2. (b)

      applies only indirectly to C and D, through the obligations imposed on the responsible UK parent, because C and D are parent undertakings established in a third country;

    3. (c)

      applies only indirectly to H, through the obligations imposed on A in its capacity as the responsible UK parent, because H is not a GCT parent undertaking; and

    4. (d)

      does not apply to E, F, G or I because they are not parent undertakings.

  3. (3)

    1In this example, B is a responsible UK parent because:

    1. (a)

      B has two subsidiaries (a direct subsidiary, C, and an indirect subsidiary, D) that are both parent undertakings established in a third country and that would be relevant financial undertakings if they were established in the UK; and

    2. (b)

      B does not have a subsidiary in the UK that is the parent undertaking of C or D. (Although F is a UK subsidiary of B, F is not a parent undertaking.) This means that there is no intermediate parent undertaking in the UK between B and either of C or D.

  4. (4)

    A is not a responsible UK parent in relation to C and D. This is because A has a subsidiary, B, that is a parent undertaking of C and D and that is incorporated in the UK. B is therefore an intermediate parent undertaking in the UK between A on the one hand and C and D on the other.

  5. (5)

    B is a responsible UK parent in relation to C and D. Note that B is the responsible UK parent of both C and D, even though D is only an indirect subsidiary of B. This is because there is no parent undertaking between C and D that is established in the UK and the definition of a subsidiary includes subsidiaries of subsidiaries.

  6. (6)

    Under MIFIDPRU 2.6.7R(2), B therefore has the choice of whether to:

    1. (a)

      ensure that both C and D comply with the requirements of the group capital test as it would apply to them if they were established in the UK; or

    2. (b)

      hold own funds instruments that are sufficient to cover the sum of the requirements of the group capital test that apply to B and would apply to C and D if they were established in the UK.

  7. (7)

    If B chooses the approach in (6)(a), B must:

    1. (a)

      hold sufficient own funds instruments to cover the sum of B’s holdings in, and contingent liabilities in favour of, C and F;

    2. (b)

      ensure that C holds sufficient own funds instruments to cover the sum of C’s holdings in, and contingent liabilities in favour of, D and G; and

    3. (c)

      ensure that D holds sufficient own funds instruments to cover the sum of D’s holdings in, and contingent liabilities in favour of, E.

  8. (8)

    If B chooses the approach in (6)(b), B must hold sufficient own funds instruments to cover the sum of:

    1. (a)

      B’s holdings in, and contingent liabilities in favour of, C and F;

    2. (b)

      C’s holdings in, and contingent liabilities in favour of, D and G; and

    3. (c)

      D’s holdings in, and contingent liabilities in favour of, E.

  9. (9)

    A is, however, a responsible UK parent in relation to H. This is because A is a GCT parent undertaking that is the parent undertaking of H. H is a relevant financial undertaking (being a holding company, and therefore a financial institution) and a parent undertaking. H is not a GCT parent undertaking because H is not an authorised person and does not have a MIFIDPRU investment firm as a subsidiary. There is also no intermediate GCT parent undertaking between A and H.

  10. (10)

    In a similar way to B above, A therefore has a choice under MIFIDPRU 2.6.7R(2) of whether to:

    1. (a)

      ensure that H complies with the requirements of the group capital test as if it applied directly to H; or

    2. (b)

      hold own funds instruments that are sufficient to cover the sum of the requirements of the group capital test that apply to A and would apply to H.

  11. (11)

    If A chooses the approach in (10)(a), A must:

    1. (a)

      hold sufficient own funds instruments to cover the sum of A’s holdings in, and contingent liabilities in favour of, B and H; and

    2. (b)

      ensure that H holds sufficient own funds instruments to cover the sum of H’s holdings in, and contingent liabilities in favour of, I.

  12. (12)

    If A chooses the approach in (10)(b), A must hold sufficient own funds instruments to cover the sum of:

    1. (a)

      A’s holdings in, and contingent liabilities in favour of, B and H; and

    2. (b)

      H’s holdings in, and contingent liabilities in favour of, I.

MIFIDPRU 2.6.9R

1A UK parent entity must have systems in place to monitor and control the sources of capital and funding of all relevant financial undertakings within the investment firm group.

Group capital test: reporting requirements

MIFIDPRU 2.6.10R
  1. (1)

    1Where the FCA has granted an application under MIFIDPRU 2.4.17R, a UK parent entity and any other GCT parent undertakings in the investment firm group must comply with the reporting requirements in (2).

  2. (2)

    Each GCT parent undertaking in (1) must:

    1. (a)

      report in accordance with MIFIDPRU 9 how that GCT parent undertaking meets the group capital test; and

    2. (b)

      if the GCT parent undertaking is a responsible UK parent, also report in accordance with MIFIDPRU 9 how:

      1. (i)

        the undertaking in MIFIDPRU 2.6.7R(1)(b) holds the required amount of own funds instruments referenced in MIFIDPRU 2.6.7R(2)(a); or

      2. (ii)

        the GCT parent undertaking holds at least the amount of own funds instruments to cover the amount applicable to the undertaking in MIFIDPRU 2.6.7R(1)(b), as referenced in MIFIDPRU 2.6.7R(2)(b).

MIFIDPRU 2.6.11R

1An investment firm group may designate one parent undertaking in the UK to submit reports to the FCA under MIFIDPRU 2.6.10R on behalf of the GCT parent undertakings in the investment firm group.

Inclusion of holding companies in supervision of compliance with the group capital test

MIFIDPRU 2.6.12G

1UK investment holding companies and UK mixed financial holding companies are included in the FCA’s supervision of compliance with the group capital test where they are GCT parent undertakings.